Opinion: China’s central bank digital currency could revolutionize global trade

World trade is dominated by the US dollar, euro, Japanese yen and British pound. The Chinese yuan has a share of about 3%, although China is the largest trading partner for most of the world. As the world’s largest trading nation and at the center of many of the world’s essential supply chains, China is mostly left to the mercy of other nations’ currencies to compete and drive trade.

Due to these factors, it makes sense to create a platform that can be used by those who trade with the country. Such a platform could reduce risk within the business relationship and mitigate the impact others may have on the system, such as currency speculation or sanctions.

Since 2014, when a concept of central bank digital currency (CBDC) was launched, China has been thinking about a way to make trade faster, cheaper and more efficient. From the central bank‘s perspective, monetary stability, low inflation, liquidity, and ease of use are all essential for an effective trading system.

China has thought through all modern trade and monetary difficulties and created a systematic currency, the digital yuan, to deal with them.

Automatic currency conversion

Imagine you are a company in Malaysia selling machinery to China. Historically, you would go to your bank, exchange ringgits for US dollars, and send those dollars to a bank account in China. The Chinese company would then convert the dollars into yuan. This process is time consuming, expensive, inefficient and involves several intermediaries. It also depends on the amount of dollars the Central Bank of Malaysia has (over $107 billion in 2020).

With CBDCs on everyone’s radar, central banks will devise arrangements and agreements on their use between countries. It is not a cryptocurrency that anyone can use once issued. Central banks will need to approve the use of CBDCs by one or both parties. If you want to use a CBDC, the process can be done on your phone or computer, with immediate conversion and payment. So for those who say they don’t want to “hold” yuan, they don’t have to do so for more than the few minutes it takes to transact with China’s CBDC. With the CBDC, there is no longer a need to hold foreign currency in your account if you don’t want to, and for many countries it will remove the need to rely on the dollar as an intermediary currency.

Payment delays, transaction fees and intermediaries are no longer necessary

Most companies denounce the current processes involved in the transfer of money. It takes a long time, sometimes 2-5 days or even longer, for a payment to be made and money to be received. There is usually considerable documentation and processes required to make such a payment, as well as the risk of denial or disruption of the process that may affect its completion. There are also fees and multiple intermediaries, which can affect payment along the way. It’s a constant frustration and struggle for most businesses.

With a CBDC, initiating a transfer to receive payment would be almost instantaneous. The days it takes to receive payment would be erased, helping cash flow, revenue and ultimately peace of mind. Also gone would be what is known in the West as “the check is in the mail” or “it will be there on Monday”, which affects business operations and transactions.

With current banking and financial transfers, the dreaded fees charged by intermediaries would be eliminated as a CBDC has at most a minimal fee structure. Businesses will no longer be charged various fees for transfers or business transactions, such as Visa fees of up to 2.70% per transaction fee. The challenges of sending payments during or around different holidays in Asia would also have disappeared. A CBDC removes most problems with sending payments, whether it’s fees, time, or inconvenience.

Process streamlining

The Chinese CBDC could provide a platform to build a smart ecosystem to serve companies and countries involved in trade. Logistics, export and import, transparency, and various other areas that a business has to deal with will be streamlined by a CBDC platform.

Part of this streamlining is the settlement process, which currently involves different intermediaries in various countries and complex and costly regulatory environments. Take the export and import of goods. With the Malaysia example above, using the same CBDC transfer method, a CBDC, because it is a smart digital currency, can have additional features programmed in such as documentation, weight , the price of the goods shipped or the calculation of taxes. All of this is currently provided by exporters in tons of documents.

A CBDC can be designed to streamline and expedite customs and improve logistics efficiency for those who use it. Because it’s digital, it can also be tracked, improving usability and solving challenges, all in real time.

A challenge for some businesses is fraud, incomplete or false documents, or sending money to the wrong account. The CBDC can identify and trace goods and payments in the system as this information is integrated and confirmed by various parts of the network in real time. This capability will remove current system challenges and build confidence in the transaction.

With the current need to use an intermediary to transfer money, these entities have little incentive to modify a system from which they have largely profited. Innovative forms of technology and fintech would be supercharged, creating new solutions and services for customers to enjoy a nearly frictionless payment system.

By using the dollar for a transaction, a country, a company or an individual is indebted to the value of the dollar. As we have seen with the recent situations in Russia and Iran, sanctions can destabilize an entire monetary system or a country. This wide use of sanctions and other measures against users of the dollar, who do not follow the whims and actions of the United States, ultimately causes people to use it less. China’s CBDC will play a key role in reducing reliance on the dollar and providing countries with other trading currency options.

Potential challenges

Some potential downsides to using a CBDC are that it is not as anonymous as cash, can be restricted to a specific use, and is usually focused on a particular region. “Cash is king” became a mantra of the financial world in the late 1980s. Few assets compare to cash in terms of anonymity and ease of use, and this is the asset most convenient to use. A CBDC can be designed to be used in a specific transaction and not in others, which limits its usefulness.

Since central banks create CBDCs in a particular country, the currency can only be used within a national digital payment framework until agreements are reached with other banks and entities for its use. This process will take years and not everyone will be part of it. Unlike cash, it will not be able to cross borders without having these agreements in place.

Getting people to use a CBDC will be difficult even in the country where it is issued. Many transactions focus on day-to-day transactions and usage, such as buying groceries or ordering delivery. Some companies may use it, but what do they do with it? A question asked is can we pay the suppliers with? The answers to these questions are unclear and need to be resolved before full-scale application and implementation of a CBDC is complete.

Cameron Johnson is an adjunct professor at New York University and a partner at Tidalwave Solutions.

The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.

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